Social and Behavioral Sciences Commons^™

We study the relation between credit conditions, misallocation of resources, and productivity growth in a multi-sector model with financial frictions. In our framework, working capital constraints and borrowing limits create wedges between the marginal product of inputs and their relative prices, which we can map into distortions to the capital to labor ratio and to the use of intermediate goods. The distribution of these distortions across sectors and their changes over time affect aggregate TFP. We construct a novel dataset for the Mexican manufacturing activity that merges real and financial data at the 4-digit sectoral level and use our model …